Financial institutions are businesses that facilitate monetary transactions. These organizations might be for-profit or non-profit. Currency exchange, lending facilities, deposits, and investments are among the transactions available. Financial institutions participate in the gathering of money from the general public and the investment of that money in assets such as bonds and equities. Almost everyone deals with financial institutions on a regular basis. Within the financial sector, there are numerous commercial processors. Insurance companies, commercial banks, investment dealers, trust companies, and brokerage firms are among the processors. 2017 (Investopedia.com) The major types of financial organizations and their functions are as follows:
Financial organization types and their functions
They are profit –based financial institutions that accept monetary deposits. They also offer security and convenience to their clients as far as financial issues are concerned. Initially, commercial banks were for the purpose of keeping money safer than when such money is in the wallet or in homes. Money kept in wallets or in homes, is at risks of loss due to theft, accidents and loss of interest income which accumulates when money is kept in banks. Keeping money in commercial banks enables one to avoid handling large volumes of money as transactions can be made using debit or credit cards and checks.
Banks provide loan facilities to their clients. These loans are useful in purchasing goods and services and expansion of businesses. This results in making more deposits to the banks. Commercial banks lend money at an interest. If the interest rate is higher than operation costs, the banks earn profit.
Commercial Banks act as also play a role of intermediary when payments are made between countries. Banks can also make arrangements for wired transfers with other financial organizations. This is done by use of a check. The check acts as promissory note between organizations or individual. The Bank name and information in a check makes it more appealing and acceptable. Checks are used between Merchants to make payments. The banks act as the agents of payment. Checks are convenient more secure to carry around than carrying large amounts of money.
There are three types of commercial banks; public, private and foreign sector banks.
Public sector commercial banks
The public commercial banks are commercial banks that have been made national by the government in a certain country. Banks in the public sector have a government as their major stake holder. For instance, in India, all the public sector commercial banks activities are under the rules of Reserve Bank of India. This is the chief array of India. Examples of the municipal segment arrays in India include the State Array of India, Business Array, Array of Baroda, Dena Array, and Punjab State Array.
Private sector commercial banks
Private profit-making banks are commercial arrays in which the major stake holders of capital individuals and private businesses. These banks are enumerated as limited liability companies. Examples of Indian reserved segment arrays include the Business Acclaim and Venture Corporation of India and Housing Improvement Investment Corporation Bank.
Foreign sector commercial banks
Foreign profit-making banks are the commercial banks whose headquarters are based in a foreign country. The branches of foreign sector commercial banks are in different countries and operate there. For instance the overseas arrays operational in India are Hong Kong and Shanghai Banking Corporation , Citibank, American Express Bank, Standard & Chartered Bank, and Gridley’s Bank. The number of foreign banks is increasing rapidly in India
The Investment Banks
Investment Banks are financial intermediaries which offer financial services to Governments and business organizations. They are involved in the countersigning of debts and equity contributions, intermediation between a security issuer and the public making an investment, formation of markets, enabling mergers and co-operate reformation and broker services for organization clients. Investment banks are providers of financial advisory services and research to organizations. They focus generally, on the Initial Public Offering of a large public and the private share offerings. Venture funding can be divided into anterior, intermediate and rear offices.
The Anterior office
The main role in the front office is to generate revenue. It has two main areas: marketing and investment banking. Investment Banking is involved with offering advisory services to organizations about mergers and strategies of raising large amounts of capital (corporate Finance). The marketing part is divided into trading and sales and research.
Corporate finance
This is the process of giving advisory services on mergers and assisting clients to raise funds for business capital. Investors may be subscribed for a safekeeping offer, coordinated through business dealers or assisted to negotiate with union organization.
Sales and trading
Buying and selling of products is the main goal of an investment bank. Trades purchase and vend commercial goods in market making for the aim of creating more currency on every job. The investment bank sales force call on institutions to suggest trading ideas accept orders. These orders are then communicated by the sales desk to the suitable trading rooms. These trading rooms price and execute trade, or configure fresh merchandises that fit an explicit requirement. Investment banks take risk through proprietary trading. This is done by a distinctive set of dealers. These dealers do not interact with customers via major peril which the threat assumed by a merchant purchasing product to a customer a fails to evade his full experience.
Research
Researching involves reviewing companies and writing reports concerning the outlook of such companies. The sell-side analysts of various investment banks cover various businesses. Funded or exclusive trading agencies also do a buy-side investigation. The sources of the research divisions assist a trader in to trade the sales, the transactions handlers to suggest concepts towards clients and the financiers by protecting the customers.
Through investigation the external clients are able to get investment advice. This advice may include organizational investors and high-net-worth personalities. Such information helps in finding clients that can hopefully execute the suggested business ideas via the transactions and trading detachment of the bank hence generating income for the organization. Never the less there exists a possible conflict of awareness amid the venture arrays and their investigation. The published investigation can affect the performance of a security or effect the affiliation among an investment financier and their business customers thus affecting the array's productivity.
The intermediate office
Peril administration
Peril administration takes place at a middle office. This involves the analysis of markets and acclaim peril take by a venture array or its customers onto their equilibrium page throughout businesses or trades. Capital markets activities are the main focuses of Credit risk .These activities include syndicated loans, pledge issuance, reorganization, and leveraged investment. Additional risk groups comprise of national peril, operative peril, and duplicating perils which might and otherwise might not occur on an array to array basis. Acclaim hazard resolutions remain an important portion of the wealth souk businesses. These involve dues construction, amendment of loans, financing projects leveraging of buy-outs and hedging of portfolios.
The Middle office
The middle office area of an investment bank consists of the treasury management, the interior corporate strategy and the core controls. The responsibility of the corporate treasury is funding an investment bank, management of capital and monitoring of liquidity risks. The Interior corporate takes part in control of tracks and analysis of the capital flows of the Bank. The senior management gets financial advice from the interior corporate. The advice is in areas such as the control of the organization's universal risks publicity and structure and the productivity and arrangement of the organization's various enterprises.
The Interior corporate strategy takes part in undertaking the firm administration and profit system. I t is non-revenue stimulating nonetheless a crucial useful role within investment banks. Specific desks in the front and back offices might take part in the inner tasks
The rear office
The rear office takes part in checking the data of the transactions that have taken place. It makes sure that data is correct and transfers the required ones.
Role of Technology in investment banks
Technology plays a key role in the success of investment banks. Technology teams of major investment banks have created significant quantities of computer soft wares; these technology teams also offer technical support. In recent years, technology has evolved changed considerably and electronic trading is now used in many trading and sales desks in banks. In some cases, complex procedures can be used in trading to be hedging.
Investment management institutions
This involves the management of securities and assets. Securities managed by investment managers may be stocks or bonds. Examples of assets managed are real estates. There are goals to be met in order to benefit the investors. The Stockholders might be organizations such as corporations, insurance corporations and annuity coffers. Investment can also be done directly through investment contracts and through investment funds.
Merchant banking
This is a kind of a personal banking in which the merchant banks offer investment in exchange for shares instead of loans. Merchant banks can also offer advisory services to their clients on management. A merchant bank can also refer to the set apart equity part of a firm. Merchant banks are dealers mostly in international finance and in provision of loans for companies. They are therefore experts in transnational trade, thus enabling them to be able to deal with multinational corporations. Some of the services of Merchant banks may be similar to those of the investment bank. However, they do not provide regular banking services to the public.
The Insurance Companies
Insurance companies are companies that cover against risks. Risk coverage is facilitated by the collection of payments from a large number of individuals. Such people need to protect themselves and their treasured ones from a specific damage. These losses may include fire, sicknesses, lawsuit, accidents, lawsuit, disability and death. Through the Insurance companies’ services, individuals and organizations are able to handle risks and reserve wealth (Blundwell wignal, A.P. Atikinson and S.H Lee (2008)
Insurance companies are able to operate profitably and pay for the assured claims through the insurance of a great number of people. Insurance companies use arithmetical scrutiny to scheme their authentic losses within a specified class. The companies consider that the assured personalities will not encounter loss together.
Brokerages A brokerage intercedes amid sellers in addition to buyers to facilitate security transactions. These companies receive compensation in terms of commissions after successful completion of a transaction. For instance, when an order for a stock takes place, a fee is paid to the brokerage company for the efforts of trade execution.
A brokerage can operate on a complete service or on concession. When on complete service operation, the brokerage company offers services such as advice on investments, managing portfolio and execution of trades. The companies get a certain amount of commission in exchange for their great quality services. The discount brokerages enable stockholders to undertake their venture investigation and generate fruitful judgments. Discount brokerages get smaller commissions from investors as they do not provide services in full. (Investopedia. com, 2017)
Investment Enterprises
Investment enterprise is a company that offers investment to individuals. The investors invest in different, skillfully managed portfolios of security by combining their funds. The investors also can buy securities circuitously via a bundle similar to a joint endowment. Investor enterprises have got of three chief categories: the unit investment trusts, face aggregate license corporations and managed venture corporations. The three are common such that;
They have complete benefits in the treasuries relative to the dividends held.
They have large amount of different securities.
They are all managed by professionals.
They are managed professionally
There are specific investment goals to be accomplished
Unit Investment Trusts (UITs)
These are enterprises that are recognized under a treaty agreement. Their characteristics include: Management of the trusts being under a trustee. The investment trustees take part in selling a fixed number of shares to the holders of the units. These holders in return receive a relative number of shares from the net income of the trust. The securities of the unit investment trusts can be redeemed. These securities are a representation of a certain portfolio. Portfolios are rarely under supervision and management as are fixed if the trust exists
The face Aggregate License corporations
These are companies that issue debt Licenses and certificates according to an already set interest rate. Certificates may be redeemed aimed at a secure sum on a set day or else aimed at a certain submission worth prior to maturity. The credentials may either be acquired on cash payment terms or on installment terms of payment. In present days, the Face aggregate license companies are rarely found.
Managed Ventures CorporationsManaged ventures are the commonest types of investment enterprises. They actively manage portfolios of securities in order to accomplish the investment goals. Closed-ended and Open-ended investment companies are the main types of the managed venture corporations. Their differences come about primarily when investors take part in buying and selling shares in the main and subordinate markets and the sort of securities the venture corporation trades.
Closed –end venture companies
Closed-end venture companies are the investment companies that only offer share in a one – time public offer. There is no continuous offer of share or redemption of the same as in the open-end venture companies. Investors may buy the shares on open markets and vend in a similar technique. The bazaar worth of the endowment stocks is to be according to demand and supply of other similar securities. Shares may be sold at a premium or a discount of the net value of the asset instead of being sold at the similar value.
Open-End Venture Companies
The Open-end venture companies are also known as the mutual funds. They take part in continuous issue of new shares to their clients. Such shares can only be bought and sold in the company.
Loans and savings association
Loans and savings associations are also referred to as Thrifts. These associations resemble banks in almost all their features. However, unlike banks Loans and savings associations lawfully only have a 65% of their lending’s, in suburban secured loans. Other types of loaning are also permitted. (Public Finance Management systems by Brooke, (245-149), 2003). The Loans and savings associations were established mainly to the exclusiveness of commercial banks. Initially, commercial banks were known to accept deposits from relatively wealthy individuals thus did not offer loans to the ordinary people. The loans and savings associations normally offer loans at a lower interest rate as compared to banks. They also have higher interest rates on deposits than those in bank deposits. This is mainly because Loans and savings associations are privately and mutually owned.
The Credit Unions
Credit unions are an additional substitute to systematic commercial banks. Their organization is usually not aimed to make profits. Just like banks, they can get chartered at centralized or national level. These unions usually charge a higher rate on the deposits than on loans. In credit unions, membership was limited to a membership group and not opened to the public. These groups included churches, company employees among others. In current ages, however, these limitations have been alleviated substantially. (investopedia.com) Shadow Banking systems Shadow banking systems are financial intermediaries which are involved in the creation of credit across global financial system. Their members are not subjected to supervisory oversight. In the shadow banking systems there are unregulated activities while the banks are regulated. The shadow banking systems escapes regulation as it does not accept deposits by the traditional banks. These institutions do not have capital requirement
In the U.S the activities of the shadow banking system are considered as financial procedures of non-bank financial institutions out of the scope of the regulations of the state. Other institutions that are not under federal regulations are the lenders of mortgages, the hedge funds, the private equity funds and payday lenders among others. They are all the growing sources of credit in the economy. Most of the activities of the shadow banks involve creation of the collateralized loans and the purchase of agreements to be used for a short period in lending activities between shadow banks and the broker dealers. Peer to peer lending is the most growing part of the shadow banks in the U.S. Examples of lenders of the peer to peer lending include Lending Club.com and Prosper.com
Never the less, the kind of the procedures in the shadow banking systems in the U.S initially produced some complication. Most of these institutions engaged in shorter borrowings and longer lending. They funded long-standing pledges by short-ranged debts. This increased the vulnerability of these institutions to increased short-range rates. When there was a rise in these rates, the institutions were forced into the liquidation of investments the making of marginal calls. Furthermore, due to the reason that the shadow banks were not part of the U.S formal system of banking, they failed to receive emergency funding facilities. (New York international monetary Fund, 2007)
The private pension funds and government funds
Private pension funds and government retirement funds accept periodic disbursements of contributions which are either habitually subtracted from salaries or paid willingly. The pension and retirement funds are obligated to offer superannuation revenue. This is done normally in the form of endowments, to personalities covered by these retirement funds. The liabilities of private pensions fund and government retirement funds are equitably sure with their timing and are of a long-standing nature. They therefore capitalize funds in long-term monetary instrument, such as the commercial shares and pledges.
The national governments have fortified the development of the pension funds by legislation actions that ensure the development and establishment of pension funds. Tax incentives are given to the contributors to lower their pension contribution costs. An example of a tax incentive is the federal 403(b). (Financial Strength, 2009).
In conclusion, financial institutions are of greater help in economic development of a country. They are important financial intermediaries. They are of vital financial purpose in the financial markets as they take part in channeling the extra funds from to individuals as savings the offering the funds to finance capital investments at a rate thus making profit
Works cited
Business Expert Systems, C. W. Holsapple and A. B. Whinston, Irwin, Homewood, IL, 1987.
Financial Strength, 2009 Blundwell-Wignall, A, Atkison and S.H Lee, 2008 The performance of financial groups by S. Schich and A. Kikuchi
http://www.investopedia.com. Accessed on 8th Nov 2017
OECD Financial Markets Trends no 86, March 2004, (63-81) The journal of economic perspectives, 1919; (97-112) The journal of budgeting, vol. 14
Public Finance Management systems by Brooke, (245-149), 2003
Public investments and private partnerships by Schick, A, 2008 Financial management by Allen, R, Hemming, R and potter, B
The evolving functions and organization of finance ministries by Allen, R and Murphy, P
Www.economicsdiscussion.net/banks/commercial-banks-its-functions-and-types. Accessed on 10th Nov 2017
